Arguments for Deflation - From John Mauldin's Newsletter:
See below. I have high-lighted text most relevant for the investor with a long-term approach to money management:
Now, I argued above that the Fed is not really expanding the money supply, so far. But within a few quarters, we will be facing outright deflation. The Fed is going to monetize at least a portion of what will be a $1+ trillion dollar US deficit. They have announced they are going to purchase $800 billion in mortgage-backed and other types of consumer loan assets. That will be a direct infusion of dollars into the economy. That is serious monetization. But they may feel they have no choice if they want to keep the US economy from going Japanese.
When someone becomes a Fed governor, they take them into a back room and perform a DNA transplant on them. They come out of that room viscerally, almost genetically, focused on preventing deflation from happening on their watch.
How much monetization will be enough to halt deflation and overcome the slowdown in the velocity of money and the rise in personal savings? No one knows. There is no fancy equation or model which can encompass all the factors, or at least not one I know of.
We will also soon see which of the additional deflation-fighting policies that Bernanke outlined in his 2002 "helicopter" speech the Fed will adopt. It is highly likely that we will see more than a few of them. It is quite possible that we will see the Fed start to set rates on longer-term bills and even bonds in an effort to pull down longer-term rates for corporations and individuals.
We will explore all the deflation-fighting options and what the results might be in future letters, but remember that there will come a time when the Fed will have to "take back" some of the liquidity they are going to provide. That means we could be in for a multi-year period of slow growth after we pull out of this recession. And this recession could easily last through 2009.
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
Counter-argument for the Small-Cap Sector
Don Vialoux mentioned in his newsletter today that there is seasonal strength for the small-cap sector:
Small Cap stocks on both sides of the border are recovering following the end of tax loss selling pressures. iShares on the TSX Small Cap Index popped yesterday and is close to breaking above a base building pattern. A trade above resistance at $8.78 will complete the pattern. ‘Tis the season for small cap stocks to outperform the market!
Norquay's book was also mentioned. Ken Norquay is Director and Chief Market Strategist of CastleMoore Inc. The key point made about 2008?
In the 1970s, mutual fund manager John Templeton used to tell us: “We shop the world looking for unrecognized value [in the stock market]. We buy these stocks and hold them for three or four years until the value is recognized.” Perhaps modern investments should be managed the way Sir John once managed his mutual funds.
Now-a-days CastleMoore tells us: “Buy, Hold and Know When to Sell.” Perhaps modern investors should adopt the CastleMoore Way.
We have to learn from their mistakes. We have to learn from our mistakes too. There should be mass firings of the directors and senior managers of the financial big three and the auto big three. Should there be a few firings in your personal investment world? 2009 is a good year for you to find a better way, before you too need a bail out.